Boston Fed’s Collins says ‘prudent to normalize policy a bit further this year’

In a speech titled “Assessing the Balance of Risks in the Economy”, Boston Fed President Collins said: “Economic growth remains solid, despite headwinds from tariffs and uncertainty. But job gains have declined notably – though without a substantial rise in unemployment. Inflation, which had been heading back to the FOMC’s 2% target, has picked up recently and is likely to remain elevated in the near term, largely due to tariffs. The slowdown in hiring this year likely reflects reductions in both labor supply – largely linked to immigration restrictions – and labor demand, a confluence of factors that is difficult to disentangle. This raises the risk that labor demand may fall short of labor supply, which could eventually lead to a more substantial rise in the unemployment rate. Anemic hiring amid solid growth likely reflects firms’ reluctance to hire in a highly uncertain environment, and robust labor productivity growth is allowing firms to meet demand. A productivity-enhancing mindset is ubiquitous in my discussions with CEOs of large and small businesses across New England – including investments in AI as well as in more traditional technologies. Though significantly down from its peak, inflation has risen in recent months largely due to tariffs. I expect the economy to experience some more negative effects from tariffs over the remainder of this year and into early 2026, as pass-through to consumer prices continues, reducing household purchasing power and spending. The upside risk to inflation cannot be discounted after more than four years of above-target price growth. However, a softer labor market, the potential for continued strong productivity gains, and generally stable inflation expectations reduce the risk of inflationary pressures. With inflation risks somewhat more contained, but greater downside risks to employment, it seems prudent to normalize policy a bit further this year to support the labor market. Even with some additional easing, monetary policy would remain mildly restrictive, which is appropriate to ensure inflation resumes its decline once tariff effects fade. But policy is not on a preset path, and going forward, policy decisions will continue to be guided by the evolution of the data and their implication for the outlook.”